Whoever wins the US presidential election today is unprepared for the scheduled crisis that will take place in his or her first year in office. Here’s why 2025 is going to present a fiscal test that neither Kamala Harris nor Donald Trump is ready to pass.
In 2017, Republicans in Congress passed and then-President Donald Trump signed into law the Tax Cuts and Jobs Act. Legislation usually requires 60 votes to pass the 100-member Senate because of the necessity of securing a three-fifths majority vote to end debate on a bill. But there’s a special legislative procedure called ‘budget reconciliation’ that allows the Senate to bypass that requirement and pass a bill with a simple majority of 51. Republicans used that procedure to pass the TCJA with 51 votes exactly.
Because the bill was passed under budget reconciliation, it is not allowed to increase the deficit beyond a ten-year budget window. To get the math to work to satisfy that requirement, nearly all the individual provisions of the TCJA expire at the end of 2025. That means if Congress does nothing, nearly all taxpayers will face a tax hike as the tax code reverts to its pre-TCJA state.
Democrats knew that would be unpopular. They say they oppose the TCJA and often say it only cut taxes for the wealthy (which is not true), but in practice they would be very unlikely to allow the TCJA to expire for the vast majority of taxpayers. Because Republicans would be likely to get something they want extended at the end of 2025, Democrats set a deadline for something they want extended to coincide with it.
In the American Rescue Plan Act of 2021 and the Inflation Reduction Act of 2022, both of which Democrats passed using the same budget reconciliation process Republicans used for the TCJA, they suspended income limits on subsidies for health insurance under the Affordable Care Act (a.k.a. Obamacare). To make the math work for reconciliation, they set the expiration date for that suspension to the end of 2025, just like the individual provisions of the TCJA.
This set up a budget-busting bipartisan exchange for the end of next year: Republicans get their tax-cut extension, Democrats get their health insurance subsidies extension, everyone is happy (except the Treasury). Congress loves to pass giant spending bills like this at the end of the calendar year, around Christmas when most people aren’t paying close attention to politics.
Then in 2023, President Joe Biden and then-Speaker of the House Kevin McCarthy made a deal to raise the debt limit, the ceiling above which the US government cannot borrow. The government will run into the debt limit again in, you guessed it, 2025. Also expiring in 2025 are the caps on discretionary spending that were included in the debt-limit deal.
The American Rescue Plan Act also included $350 billion for state and local governments, purportedly for responding to Covid, but it was actually used for a wide variety of government programmes. That money must be obligated to be spent by the end of this year, and must be actually spent by the end of 2026. So in 2025, state and local governments will know roughly how much money to ask the federal government for to continue those programs. They will see an opportunity to secure it in the fiscal negotiations these other deadlines have set in motion.
It will be a similar story for infrastructure projects. The U.S. passed a $1.1 trillion infrastructure law in 2021. Because of the sheer size of the spending and the tightness of the labor market, the law has contributed to inflation in the construction sector. That means many projects are going to be over-budget and will require even more funding to be completed. Roughly $400bn in contract authority from that infrastructure law will expire in 2026, so contractors will begin crowding Washington next year with requests for more funding.
All of this will happen in the first year of the presidency of either Donald Trump or Kamala Harris. One might think that this completely predictable confluence of fiscal issues would be a major focus of the campaign, but it has not been. Neither candidate has any plan to substantively deal with these issues, decisions on which will need to be made next year, whether they like the thought of that or not.
This ‘mother of all fiscal cliffs’ could blow a $5trn hole in the US economy just to keep current law in place. Making matters worse for the US fiscal situation, the first year of a new administration is generally a time when presidents want to spend more to reward their various voting blocs for electing them. So not only is no candidate promising fiscal rectitude, but the political winds will be at the president’s back to spend more on new initiatives next year.
And that rather grim picture is just for the stuff that we know is going to happen. Any number of other problems could present themselves in the course of an entire year of world events which could demand more tough decisions and possible need for government spending. The potential reemergence of inflation should not be discounted, as neither candidate seems willing to acknowledge economic trade-offs in government budgeting, and the electorate demonstrates little patience for any talk of actual spending cuts that would significantly alter the US fiscal trajectory.
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